Global supply chains are in a snarl. Dozens of container ships sit off the shores of places as far-flung as Los Angeles, Shanghai, and Rotterdam. Fall earnings calls have been peppered with talk of bottlenecks and downside risks. Dislocations and shortages have led to big price jumps, boosting U.S. inflation rates to three-decade highs.

Still, nearly two years into a global pandemic, international supply chains have weathered market shocks better than most expected. They have adjusted and adapted in some ways, but they have mostly continued on as before.

A growing number of government policies, however, threaten to upend international supply chains and the global business environment more broadly. Country after country is reshaping the business landscape with a mix of novel regulations and barriers to trade, often under the banner of pursuing a more robust form of industrial policy. The impetus behind these policy moves is often laudable: curbing carbon emissions, for example, or creating new opportunities for workers. Ultimately, however, a number of these policies will end up being counterproductive. Solar panel tariffs and domestic content rules on electric vehicle tax credits, for example, will slow the green transition. Import levies and export controls will destroy good-paying export-oriented jobs. It is these choices and changes—and not the pandemic—that will prolong supply chain uncertainty.

Don’t Just Blame the Pandemic

To be sure, some of the current economic and commercial mismatches are the product of shutdowns induced by the pandemic. The global reopening has been both slow and stuttered: the rise of new variants, health policy reversals compounded by time-consuming protocols, and disjointed vaccine rollouts have made it tougher to get goods to market. Labor shortages are another factor making it hard for business to return to normal. Some are directly related to COVID-19, and others are the result of millions of workers making different life choices—leaving the nomadic uncertainty of trucking for a steadier, better-paying day job, for example. While trucking has faced shortages for years, these professional exits are one important reason why the United States currently faces a record 80,000 driver deficit, as estimated by the American Trucking Association.

Atop these supply strains has been a surge in consumer demand, especially in the United States. In contrast to past recessions, Americans didn’t stop buying when the pandemic cratered the economy. Loans from the federal Paycheck Protection Program saved hundreds of thousands of businesses and millions of jobs, and nearly $400 billion in government stimulus checks hit individual bank accounts. Add in savings from fewer restaurant dinners, movies, and vacations, and the median U.S. checking account balance grew by several hundred dollars.

As Americans spent, they bought goods rather than services. With the shift to work from home, many laid out for new computers, comfy clothes, gym gear, kitchen appliances, and construction materials to spruce up their surroundings. Overall, U.S. consumers have bought nearly $1 trillion more in goods in 2021 compared with pre-pandemic times. This surge in physical products would have tested supply chains even in a normal economic environment.

U.S. consumers have bought nearly $1 trillion more in goods in 2021 compared with pre-pandemic times.
In the wake of these combined strains and shocks, logistics costs rose, and many had to wait longer for inputs and finished goods from abroad. But most shelves, at least in the United States, didn’t stay empty for long. Companies got creative when shipping costs skyrocketed, placing orders directly with factories to cut out intermediaries or commandeering their own container ships and planes to ensure timely delivery. Logistics operators invested in technologies using algorithms and artificial intelligence to find more efficient delivery paths. The biggest U.S. ports processed more containers than ever before even as they faced rising backlogs. And many companies adapted “just-in-time” operational practices by expanding orders, stockpiling inventory, and duplicating suppliers to maintain continued access and supplies. In the end, international supply chains proved to be more resilient to unpredictable supply constraints and demand surges than most analysts thought possible.

At Home and Abroad

What is likely to lead to structural shifts in the way things are made and delivered around the world is the return of industrial policy. It is the actions of governments, not the temporal effects of the pandemic, that could permanently alter how goods are made and brought to market.

Governments are increasingly attempting to directly influence markets, industries, and even the activities of individual companies. Officials have multiple reasons for doing so. Governments around the world are using policy levers to fight a warming climate, putting in place all sorts of subsidies, incentives, and taxes to hasten a green transition. Others are working to shore up health systems and expand public medical stockpiles, securing access to vaccines, vital medicines, and medical devices to protect their populations in the face of current and future health threats. Some are employing policy carrots and sticks to protect human rights by banning imports made with forced labor or in factories without adequate worker protections or pay. And many are adding public economic tools to the portfolio of policies used to enhance national security.

Old-fashioned protectionism hasn’t disappeared either, of course. Policymakers are shaping markets to further maintain or gain a competitive economic edge for their companies and industries. And although these actions often come with sincere motives to slow climate change, protect the vulnerable, or level the global playing field, these economic tools are also useful weapons between geopolitical rivals.

It is the actions of governments, not the pandemic, that could permanently alter how goods are brought to market.
Governments have been particularly keen to shape semiconductor production. Much has been made of the very real semiconductor shortages around the world, particularly for run-of-the-mill circuits that go into cars, gaming consoles, washing machines, and microwaves. The shortage partly reflects the pandemic-fueled explosion in demand for laptops, phones, and home appliances. The quandaries facing automakers have a lot to do with their bad business calls: most companies canceled orders in the spring of 2020, assuming that in the COVID-19 recession, demand for vehicles would fall. As we now know, it didn’t.

But government policies were shaping and reshaping global semiconductor supply chains long before COVID-19 emerged. For years, China, Japan, South Korea, and Taiwan have subsidized the local research, development, and manufacturing of semiconductors, often offsetting a significant portion of these costs, according to the Semiconductor Industry Association. These public outlays helped cement those countries’ central roles in international semiconductor and electronics supply chains. In 2018, the U.S. government redrew the industry’s global contours, first by slapping 25 percent tariffs on Chinese semiconductors and then, a year later, by banning most semiconductor and semiconductor machinery exports to China. These policy steps disrupted semiconductor trade and curtailed future production, creating scarcities and upending the manufacturing supply chains of all manner of electronics.

Unsurprisingly, those moves also sparked retaliation. China increased its domestic production, investing tens of billions of dollars to reduce its dependency on foreign-made chips and equipment (with mixed results so far). Meanwhile, governments in European countries, Israel, Japan, South Korea, and the United States are all expanding their funding for the chip industry, hoping to attract semiconductor manufacturers to their shores. The proliferation and escalation of these policy carrots and sticks—fashioned for economic, technological, and national security concerns—are proving far more important in reshaping the global semiconductor industry than pandemic-related shortages. In the end, government involvement is likely to create more rather than less volatility in global semiconductor supplies and prices, as public investments ignore market signals. Taxpayers, rather than shareholders, will end up bearing much of the cost.

It’s Not Just Semiconductors

Active industrial policies go far beyond this one technological building block. In addition to semiconductors, the Biden administration has deemed three additional industrial supply chains “strategic” and therefore in need of a stronger governmental hand: large-capacity batteries (such as those used in electric vehicles), critical minerals, and essential pharmaceutical supplies. Already, the administration is leveraging legislation, regulations, and executive orders to bring global production of these industries closer to home.

Baked into the recently passed infrastructure law and the Build Back Better bill now working its way through Congress are billions in federal dollars to fund the development of homegrown battery supply chains, covering everything from research and development to recycling. To protect U.S.-based refiners, the Commerce Department has stepped up antidumping and countervailing duties on critical minerals, fining Chinese makers of aluminum, magnesium, and carbon deemed to be selling their goods below fair market value. And the White House has expanded its use of the Defense Production Act, enacted at the start of the Korean War, which gives the president the ability to mobilize resources and direct private-sector production to meet national security and defense needs. That has spurred the stockpiling of medical masks, gloves, and medicines; the ramping up of domestic manufacturing of active pharmaceutical ingredients and rapid COVID-19 tests; and the expansion and refining of rare earth minerals in Texas.

China’s list of government-favored sectors is even longer and includes green technologies, artificial intelligence, quantum computing, neuroscience, agriculture, and robotics. In pursuit of indigenous innovation, Beijing is lavishing low-interest loans, free land, and tax breaks on dozens of potential “national champions” and protecting them from competition by ignoring intellectual property theft complaints and limiting external rivals. For instance, it has effectively kicked out South Korean Samsung- and LG-made electric car batteries by giving green subsidies only to cars with Chinese-company parts. By increasingly turning to its state-owned enterprises at the expense of domestic private firms, the Chinese government is ensuring even stronger political control of the country’s cutting-edge technological sectors. 

The Chinese government is ensuring even stronger political control of the country’s technological sectors.
And in the EU, bureaucrats in Brussels have stepped up public involvement and funding for industries including electric vehicle batteries, clean hydrogen, and cloud computing in the quest for “strategic autonomy.” They have relaxed rules governing state aid for research and development to support and cultivate European industrial champions, stepped up antidumping duties to protect European producers of minerals and fiber optics, and expanded foreign investment screening—by turning away, for example, Chinese investment in an Italian semiconductor equipment maker and a German microelectronics engineering house.

Governments’ appetites for reframing and reshaping local and international economies and business environments show no sign of abating. That means the pressures on global supply chains will continue, as well. Over time, this will lead some companies to relocate steps in their production chains and shorten some international manufacturing processes in an effort to reduce risk and increase profits. The reshoring and “near-shoring” of manufacturing to nearby countries and within regional trading blocs will rise, although not to the extent envisioned or promised by policymakers and not without significant costs to taxpayers and consumers. As the boundaries between the state and markets shift, they will reshape supply chains in ways that the global pandemic couldn’t do. 

In the best cases, these policy steps will slow global warming, spread social justice, and enhance national security goals and economic resilience. Yet in many more, they will raise costs, slow innovation, and shift the financial burden to consumers and taxpayers.

To avoid causing more harm than good, governments should be sparing in their use of industrial policies and more broad-based in their economic interventions. They should focus their efforts mostly on economic improvements, such as upgrading infrastructure, education, health care, and social supports. This includes funding basic research and development and setting global standards that define the basics of industrial processes, protocols, and products. It also involves creating and coordinating a more globally encompassing set of commercial ground rules to meet environmental, social, and governance goals. These efforts can make supply chains more efficient and resilient and nations safer and more prosperous.

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  • SHANNON K. O'NEIL is Vice President, Deputy Director of Studies, and Nelson and David Rockefeller Senior Fellow for Latin America Studies at the Council on Foreign Relations.
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